Patience Is a Virtue, Especially in Investing

What do Amazon (NASDAQ:AMZN[1]), Disney (NYSE:DIS[2]), Nordstrom (NYSE:JWN[3]) and Starbucks (NASDAQ:SBUX[4]) have in common?

All four were holdings in my portfolio 10 years ago. And I sold off all four, one after the other, after becoming disillusioned with each one thanks to weak short-term performance.

Oh, what a fool I was. Here’s the share appreciation alone (Disney, Nordstrom and Starbucks also pay dividends) for each of my castoffs during the past 10 years:

Amazon: +946%

Disney: +239%

Nordstrom: +600%

Starbucks: +360%

If there’s anything to be learned from this wince-inducing anecdote, it’s the importance of patience — especially during tough times. The U.S. stock market has proven it continuously improves over time … and good companies tend to do the same.

It’s a lesson for all investors, young and old.

My colleague Alyssa Oursler, for instance, recently stuck her first toe in the equity pool[5] by purchasing McDonald’s (NYSE:MCD[6]), one the safest and most reliable dividend stocks on the planet. Has McDonald’s ever slumped? You bet. The whole of 2012 was virtually a mirror image of the S&P 500 — MCD dropped 12% while the broader market did the opposite (and a bit more). But if I believed in the business, would I have advised her to sell (had she owned it then) amid that disappointment? Heck no.

Instead, I’d have told her that if she was thinking of selling, to consider these three things first:

Fundamental Changes: Keep an eye on your holdings for things like patterns of bad management (or changes in the C-suite), poor marketing decisions, lawsuits and other red flags[7] out there. For instance, I sold out of Hewlett-Packard (NYSE:HPQ[8]) several years back because I didn’t think its products were going anywhere in the long run. In fairness, I was ahead of the curve for the wrong reason (the financial crisis was the first thing to cut at HPQ), but the broader theme has played out. Long story short: If the company you once believed in sinks into utter turmoil[9], you have a reason to sell.

Profit Opportunity: Of course, not all selling comes when investors are scared. Sometimes it makes sense to take a little off the table when the stock is running hot and you’re sitting on big paper gains. You don’t have to cash out entirely — although if you have a better investment alternative in mind already, it’s not the worst idea — but reaping a profit means never having to say you’re sorry. I’ve learned this the hard way over time, most recently[10] with Apple (NASDAQ:AAPL[11]).

Sector or Industry Rotation: Keep an eye on where your monies are focused or concentrated, and make changes when you see signs you don’t like. If you sense an overweight and don’t like the sector, remember that rebalancing is a normal part of portfolio maintenance. Warren Buffett, for instance, has seen fit to rearrange Berkshire Hathaway‘s (NYSE:BRK.A[12], BRK.B[13]) portfolio of late, paring down consumer holdings like Johnson & Johnson (NYSE:JNJ[14]) and rotating into bank stocks like Wells Fargo (NYSE:WFC[15]).

Remember these tips, and try to avoid panic-selling at the first sniff of trouble.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long AAPL and JNJ.